For the last few years, I have tried to alternate our family summer vacations between relaxation and education: beach one year, museums the following year. In 2020, our plan was to go to Philadelphia and Washington, D.C., but that did not happen, and we ended up staying home like most Americans.

Earlier this year, we decided to go to D.C. only and I quickly made reservations for tours, restaurants, and museums. Stories of the economy reopening causing staff shortages loomed over my head as the day to leave was approaching. While the planes were full, the rest of the trip went well, and my kids really enjoyed visiting our capital and its beautiful monuments.

Whenever I go on vacation, I always joke around the office about not breaking the market while I am away. So, with the S&P 500 at new highs, I felt confident. Of course, the market, as it usually does, decided to take a turn. Equity markets were hit hard, and government bond yields dropped further at the start of last week mostly due to overbought equity conditions and less positive virus news which triggered another whiff of risk off.

As has been the case throughout the last few months, equity selling pressure soon petered out after a few days, due to still hyper-accommodative monetary and fiscal conditions, and as 2Q earnings season got underway.

For most of 2021, investors have been comfortable with the reflation story and the global economy reopening. While macro conditions remain generally supportive for equities, central banks are already talking about tighter monetary policy to bring inflation under control and there is a growing sense among investors that financial markets may have become too optimistic.

There is a shifting narrative that earnings growth has “peaked” for the rest of the year. The combination of price pressures and soaring infection rates also raises the risk that economic growth could fall short of rosy forecasts.

So far, investors have shown a willingness to look through rising virus case trends since effective vaccines arrived last November. While we believe there will be plenty of bumps along the way given elevated equity valuations, a cyclical peak in risk asset markets will likely only occur when more normal economic activity is achieved, and current hyper-accommodative monetary conditions have been unwound. As we have highlighted before, the base case for this scenario does not happen until the end of 2022 at the earliest.

A more pressing economic concern is whether another round of lockdowns might occur because of the delta virus variant. So far, the uptick in new cases has not slowed domestic mobility and most economic data have stayed solid.

If you have any questions or want to have a conversation about the market or your portfolio, please contact Liz, Ed, Fred, Scott, Tyler, or myself. Your Sendero team is ready to help. 

Best Regards,
Amaury de Barros Conti
210-930-9409
aconti@sendero.com